A

TERM PAPER

ON

“THE IMPACT OF EXPORTS AND IMPORTS ON

EXCHANGE RATES IN INDIA”

PRESENTED BY
Sec – A (29) Patel Urvi
Sec – A (22) Rathod Priyanka

PRESENTED TO
Dr. Munira Habibullah
DBIM, Surat

DEPARTMENT OF BUSINESS & INDUSTRIAL MANAGEMENT,

Surat

1
 INDEX

 INTRODUCTION
 RESEARCH METHODOLOGY
 THEORITICAL FRAMEWORK
 DATA ANALYSIS
 CONCLUSION
 BIBLIOGRAPHY

2
 INTRODUCTION

No country is self-contained to produce the goods and services that it calls for,
which leads to trade among nations and acts as an engine for economic growth as
exports are imperative to earn foreign exchanges and availability of wider market
while imports facilitate the nation by providing the goods and services not
available within the country itself.

In open economies, the policies of foreign exchange rate are some of the most
important macroeconomic indicators, because the world’s investment decisions
are affected by them. Also the success of the policy is affected by the effect of
foreign exchange rates on imports and exports, in terms of a reduction in the
foreign trade deficit. Today, the trends in the world economy as well as the
movement of goods and services, labour, technology and capital throughout the
world, regardless of the geographical boundaries, affect the economies of
countries. Trade transactions involving more than one region normally require
the conversion of a currency to another currency.

The purpose of this research is to determine the impact of exchange rates on the
imports and exports of emerging countries. The intention of this research was to
develop an empirical study which will illustrate the nature of the relationship
between imports-exports and exchange rates. The movement in exchange rates
will be assumed to be as a result of exchange rate policies.

3
 REVIEW OF LITRATURE

Mukherjee, S. and Mukherjee, S. (2012): Examined the performance of exports

and other associated factors affecting exports in India; the manufactured exports
contribute a major share of total exports of the country and identified the
increasing importance of exports in the economic growth of the country.

Paudel, R.C. (2014): Analyzed the impact of liberalization on exports of India

using ARDL approach for the period 1975-2008 and found that export supply is
affected by domestic output whereas export demand is influenced by the world
demand. The study established a favorable impact of liberalization reforms on
manufacturing exports of India.

Jayakumar et.al (2014): Highlighted the importance of various determinants of

imports and exports of India by establishing the relationship between foreign
direct investment, imports, and exports of India and found a positive linkage
exists between FDI and exports & imports.

Prasad et.al (2014): The study suggested various general and specific policy
measures like, export infrastructure, market diversification, export promotion
schemes and formation of Regional Trading Agreements, etc. to compete in
global emerging trade scenario by analyzing the current trade scenario in global
as well as in Indian trade.

Goyal, S. (2016): Highlighted the importance of exports as they help in the

economic growth of the country by contributing in foreign exchange reserves.
The study examined the trends prevailing in exports of India established that
despite of US subprime crisis, merchandised exports of India showed a
remarkable growth rate of 15.79 per cent for a period of 10 years (2004-05 to
2013-14)

Veermani, C. (2012): Analyzed the post-reform growth and pattern of India’s

Merchandise exports. It is established through the study that export growth rate
(8 per cent) in the first decade after reforms was low as compared to that of
second-decade growth rate (21 per cent). A major shift was found to be present
in India’s export destination from traditional developed countries to emerging
markets

4
Preeti & Kuldip singh chhikara (2018) :The Indian economy is fleeting through
a stressed phase due to growing trade balance deficit having an adverse impact
on the growth and development of the nation. The present study is solely based
on secondary data collected from various sources and was analyzed with the help
of appropriate statistical techniques such as Mean, Standard Deviation, CAGR,
Diagrams, Regression, and Charts, etc. to draw the conclusions. It was exposed
through the results of the study that the oil import besides other things contributes
the most in the adversity of trade balance of the nation which needs to be
addressed by the government of India and its allied agencies through measures
like, energy conservation, adoption of alternative sources of energy and the
awareness among the masses, etc. Import substitution and a surge in exports are
the need of the hour for maintaining the good financial health of the nation which
can be realized only through more capital formation and be expending more on
research and development to avoid the heavy cost of borrowings of capital and
technology

Michel Ruta and Marc Auboin ,(2011) in this paper surveys a wide body of
economic literate on the relationship between currencies and trade . Specifically,
two main issues are investigated: the impact on international trade of exchange
rate volatility and currency misalignment. Specifically, two main issues are
investigated: the impact on international trade of exchange rate volatility and of
currency misalignments. On average, exchange rate volatility has a negative
(even if not large) impact on trade flows. The extent of this effect depends on a
number of factors, including the existence of hedging instruments, the structure
of production (e.g. the prevalence of small firms), and the degree of economic
integration across countries.

HabibAhemed and et al, (2011) in this study analyses the impact of exchange rate
on macroeconomic aggregates in Nigeria. Based on the annual time series data
for the period 1970 to 2009, the research examines the possible direct and indirect
relationship between the real exchange rates and GDP growth. The estimation
result show that there is no evidence of a strong direct relationship between
changes in the exchange rate and GDP growth.

5
Kumar and et al (2008) in this paper analyzed India after the reforms initiated in
the early 1990. Unlike observed in several countries, it finds a rise in exchange
rate pass-through to domestic prices until recent years. Based economic factors
typically associated with economic liberalization, the persistence of higher
inflation is an important factor for the rise in pass-through.

6
 RESEARCH METHODOLOGY

Objective:-
 To study is whether the import or export effect the exchange rate (USD,
EURO, POUND and YEN) in India.
 To study the impact of exports and imports on exchange rates in india.

Research Design: -
Research design is the plan, structure and strategy of investigation convinced so
as to obtain answer to research question and to control variance. In other words,
a research design is specification of methods and procedures for acquiring the
information needed.
Research design can be exploratory research or descriptive research. For this
project descriptive research has been used.
Descriptive Research
Descriptive research design is a fact finding investigation with adequate
interpretation. It involves gathering data that describe events and then organize,
tabulates, depicts, and describe the data.

Data Collection:-
The study is purely based on the secondary data (for a period of seventeen years)
which is collected through various sites of GOI, journals and other related
sources.

Statistical Techniques: -
Various statistical tools and techniques like Regression Analysis, Correlation,
Coefficient and graphical representation etc.. were used to analyze the collected
data.

Regression Analysis

In the regression model India’s EXPORT and IMPORT is used as the

independent variable, and EURO, POUND, YEN and USD used as a depended
variable. Globalization has long been a strong trend and foreign trade has become
even more important, which affects GDP growth, therefore India’s Total Export,
Total Import, and Foreign Exchange are also used as an independent variable.

7
 THEORITICAL FRAME WORK

 Imports and Exports

When you hear the terms 'imports' and 'exports,' you may think of some
complicated and elaborate business you saw on a television show a few
months back. You may simply think these terms sound dull and have little
impact on your everyday life. The bottom line is that these two terms have
a dramatic impact on the economy and the selection of everyday goods that
you are able to purchase.
When you walk into large electronic stores, you expect to see top electronic
brands from across the world, not just electronics made in your neighboring
states. Can you imagine if you walked into a popular electronics store and
they only had two television brand choices? You would probably end up
paying more money and might not even like the choices you had to choose
from. These products from other countries (imports) provide more choices
for you and can also help you save money.
One of the biggest factors that influences imports and exports is the value
of currencies between trading countries. Let's explore how the value of
currencies can impact businesses and directly affect the amount of goods
and services you may have to choose from when you go shopping.

 Exchange Rate
Typically, an exchange rate is quoted using an acronym for the national
currency it represents. For example, the acronym USD represents the U.S.
dollar, while EUR represents the euro. To quote the currency pair for the
dollar and the euro, it would be EUR/USD. In the case of the Japanese yen,
it's USD/JPY, or dollar to yen. An exchange rate of 100 would mean that
1 dollar equals 100 yen.

8
Typically, exchange rates can be free-floating or fixed. A free-floating
exchange rate rises and falls due to changes in the foreign exchange
market. A fixed exchange rate is pegged to the value of another currency.
For instance, the Hong Kong dollar is pegged to the U.S. dollar in a range
of 7.75 to 7.85. This means the value of the Hong Kong dollar to the U.S.
dollar will remain within this range.

Exchange rates can have what is called a spot rate, or cash value, which is
the current market value. Alternatively, an exchange rate may have
a forward value, which is based on expectations for the currency to rise or
fall versus its spot price.

Forward rate values may fluctuate due to changes in expectations for future
interest rates in one country versus another. For example, let's say that
traders have the view that the euro zone will ease monetary policy versus
the U.S. In this case, traders could buy the dollar versus the euro, resulting
in the value of the euro falling.

Exchange rates can also be different for the same country. Some countries
have restricted currencies, limiting their exchange to within the countries'
borders. In some cases, there is an onshore rate and an offshore rate.
Generally, a more favorable exchange rate can often be found within a
country's border versus outside its borders. Also, a restricted currency can
have its value set by the government.

China is one major example of a country that has this rate structure.
Additionally, China's yuan is a currency that is controlled by the
government. Every day, the Chinese government sets a midpoint value for
the currency, allowing the yuan to trade in a band of 2% from the midpoint.

9
  Impact of export and import on Exchange Rates

The relationship between a nation’s imports and exports and its exchange rate is
complicated because there is a constant feedback loop between international trade
and the way a country's currency is valued. The exchange rate has an effect on
the trade surplus or deficit, which in turn affects the exchange rate, and so on. In
general, however, a weaker domestic currency stimulates exports and makes
imports more expensive. Conversely, a strong domestic currency hampers exports
and makes imports cheaper.

For example, consider an electronic component priced at $10 in the U.S. that will
be exported to India. Assume the exchange rate is 50 rupees to the U.S. dollar.
Neglecting shipping and other transaction costs such as importing duties for now,
the $10 electronic component would cost the Indian importer 500 rupees.

If the dollar were to strengthen against the Indian rupee to a level of 55 rupees (to
one U.S. dollar), and assuming that the U.S. exporter does not increase the price
of the component, its price would increase to 550 rupees ($10 x 55) for the Indian
importer. This may force the Indian importer to look for cheaper components
from other locations. The 10% appreciation in the dollar versus the rupee has thus
diminished the U.S. exporter’s competitiveness in the Indian market.

At the same time, assuming again an exchange rate of 50 rupees to one U.S.
dollar, consider a garment exporter in India whose primary market is in the U.S.
A shirt that the exporter sells for $10 in the U.S. market would result in them
receiving 500 rupees when the export proceeds are received (neglecting shipping
and other costs).

If the rupee weakens to 55 rupees to one U.S. dollar, the exporter can now sell
the shirt for $9.09 to receive the same amount of rupees (500). The 10%
depreciation in the rupee versus the dollar has therefore improved the Indian
exporter’s competitiveness in the U.S. market.
10
The result of the 10% appreciation of the dollar versus the rupee has rendered
U.S. exports of electronic components uncompetitive, but it has made imported
Indian shirts cheaper for U.S. consumers. The flip side is that a 10% depreciation
of the rupee has improved the competitiveness of Indian garment exports, but has
made imports of electronic components more expensive for Indian buyers.

When this scenario is multiplied by millions of transactions, currency moves can

have a drastic impact on a country's imports and exports.

Exchange rate and firm-level exports

The overall trade activity of a country is a sum of the decisions of

individual firms. Hence, understanding the effects of exchange-rate changes on
trade balance4 calls for an analysis of how exchange-rate fluctuations affect the
decisions of individual firms. Such analysis provides insights into the varied
responses across firms to exchange-rate movements and related policy
implications of central bank’s efforts to manage and stabilise foreign-exchange
fluctuations.

Compared with other firms, exporting firms are usually associated with higher
levels of productivity and profitability. Moreover, a strong export sector might
generate positive effects for other sectors that promote overall economic growth.
India has witnessed strong economic performance coupled with a strong export
sector in the past decade. Thus, it is quite conceivable that export-promoting
policies are conducive to economic growth. Against this background, we explore
how fluctuations in the exchange rate affects decisions of Indian exporting firms,
and whether the data suggests a weakening of the link between REER and exports
(Cheung and Sengupta 2013).

The use of a rich firm-level dataset enabled us to examine the varied

responses of firms to exchange-rate fluctuations in a large developing economy.
Some of the questions we looked into are:
11
  What is the impact of exchange-rate depreciation (appreciation) on exports
of Indian manufacturing firms?

 Does the textbook prediction that exchange-rate depreciation

(appreciation) boosts (deters) exports hold for Indian firms or is there no
significant association?

 What are the firm-specific features that influence their export responses to
exchange-rate changes?

 What are the macro features of the economy as a whole that impact firm-
level export responses to exchange-rate movements?

We find that a one percentage point appreciation of the REER reduces the
average firm’s export to sales ratio by 6.3%. Accounting for certain factors such
as change in nominal wages, change in world exports to Gross Domestic Product
(GDP) ratio and growth in overseas markets, this exchange-rate effect can exceed
10%. Our findings in general are also suggestive of a non-negligible negative
effect of exchange-rate volatility on the export shares of firms 5. This negative
volatility effect lends support to the reasoning that a high level of uncertainty has
an adverse effect on trade. Notable among the impact of other factors is the
finding that both real and nominal wage increases have a negative effect on
exports. This result is quite intuitive; a rise in wages increases operation costs that
then reduce the firm’s competitiveness in the global market. Labour costs are also
found to amplify the exchange-rate effects on trade. We further find that exports
of Indian firms move in the same direction as world exports. Global trade patterns
point to the general behaviour of Indian exporting firms, but do not overshadow
the exchange-rate effect.

12
  Asymmetric effects

We also find that exchange-rate appreciation is associated with a stronger

volatility effect on trade than depreciation. Furthermore, the adverse exchange-
rate effect seems to be stronger for firms with a small export share than with a
large one. Our estimates indicate that a one percentage point REER appreciation
reduces the export share by around 11% for firms with below the median6 export
shares, and by 5% for firms with export shares above the median level. Firms that
export relatively less are apparently more adversely affected by appreciation.

In terms of volatility effects, firms with below-median export shares react

negatively to REER volatility, while somewhat curiously, firms with larger
export shares react positively to a rise in exchange-rate volatility. Arguably, firms
that have a large export share could have the incentive and, possibly, the means
to benefit from exchange-rate volatility through hedging or re-directing their
exports to alternative markets that offer better exchange rates.

India’s export sector has been dominated by commercial services over the
last decade. The share of services exports in sales of firms averages around 30%,
while the average share of goods exports is only 23% in our sample. Information
technology (IT) services are a main component of India’s commercial services
exports with average export share for the IT services category for our sample
period around 64%. Accordingly, we were interested in exploring whether the
exchange rate has different impacts on goods and services export categories and
within services, across IT and non-IT sectors. In our analysis, goods’ exports
appear less sensitive to the negative exchange rate effect than services exports.
Non-IT services are the only type of services exports that seem to be significantly
impacted by exchange-rate change.

13
 DATA ANALYSIS

This study uses time series data. The main objective of study is to examine
whether the import or export effect the exchange rate (USD, EURO, POUND and
YEN) in India. The monthly exchange value of EURO, POUND, DOLLAR and
YEN as well as EXPORT and IMPORT has been used for the study. The data
period is from 2016-17 to 2020-21. The data are collected from database of
Reserve Bank of India and SEBI.

Table: 1 Correlation matrix between all variables

IMPORT EXPORT DOLLER POUND YEN EURO

IMPORT 1
EXPORT 0.990129566 1
DOLLER 0.542255568 0.567260386 1
POUND 0.400451059 0.375041128 0.907499302 1
YEN 0.119981452 0.105727338 0.733668458 0.893553047 1
EURO 0.436488221 0.412132157 0.926781666 0.989568977 0.823685007 1

Above table shows the liner correlation between Import, Export and
Exchange rate. The correlation coefficient is positive and statistically
significant at the 0.01 level. The correlation coefficient between import
and EURO, USD, POUND and YEN are negative. Export has positive
relationship between USD, EURO and Yen but there is negative
relationship between POUND and Export. So, that Export plays a
significant role in exchange rate volatility in India.

Regression Analysis

In the regression model India’s EXPORT and IMPORT is used as the

independent variable, and EURO, POUND, YEN and USD used as a

14
depended variable. Globalization has long been a strong trend and
foreign trade has become even more important, which affects GDP
growth, therefore India’s Total Export, Total Import, and Foreign
Exchange are also used as an independent variable.

Researcher’s main hypothesis for the study is that the impact of

EXPORT and IMPORT in Exchange rate (USD, POUND, EURO and
YEN).

This can either be confirmed or rejected based on the sign and

significance of the estimated value of β1 in the regression analysis. The
null hypothesis is Ho: β1 = 0 i.e. EXPORT does not contribute to
change in exchange rate, while the alternative hypothesis is β1 ≠ 0.

Table: 2 Regression analysis between EXPORT and Foreign Exchange

Variable Coefficient t-Statistic R-squared

Impact of EXPORT on DOLLER (Dependent Variable: DOLLER)
Constant 8534.650973 65535 1
EXPORT 0.56726
Impact of EXPORT on POUND (Dependent Variable: POUND)
Constant 57814.26392 65535 1
EXPORT 0.907499
Impact of EXPORT on YEN (Dependent Variable: YEN)
Constant -639312.1353 65535 1
EXPORT 0.893553
Impact of EXPORT on EURO (Dependent Variable: EURO)
Constant -54808.65169 65535 1
EXPORT 0.823685

15
 Impact of export on foreign exchange
100
Foreign exchange rate

80

60

40

20

0
0 50000 100000 150000 200000 250000 300000 350000 400000
export

DOLLER POUND YEN EURO Linear (DOLLER)

From the table above, the null hypothesis can be rejected at the 5% significance
level since the associated t-value is significant. The coefficient estimate for
Export and Foreign Exchange are also statistically significant. The Durbin-
Watson statistics is less than 2 for all variables, for H0: p=0 and H1: p≠0, dcrit
value is greater than d at 5 per cent significance level. Therefore, null hypothesis
is accepted and suggest the presence of autocorrelation in the series. Coefficient
of determination, R2 has exceptionally high, value which indicating that very
good fit between the variables or in other words in all variables is more than
60.0% of the variance in EXPORT can be explained by USD, POUND, EURO
and YEN.

According to regression analysis contribution of EXPORT in change in exchange

rate volatility is very little and impact cannot be developed directly but indirectly
impact can be measured and variation also happens the way of indirect effect in
different segment of the economy.

Table: 3 Regression analysis between IMPORT and Foreign Exchange

Variable Coefficient t-Statistic R-squared

Impact of IMPORT on DOLLER (Dependent Variable: DOLLER)
Constant 14417.26955 65535 1

16
 EXPORT 0.542256
Impact of IMPORT on POUND (Dependent Variable: POUND)
Constant 134225.1232 65535 1
EXPORT 0.907499
Impact of IMPORT on YEN (Dependent Variable: YEN)
Constant -1486218.893 65535 1
EXPORT 0.893553
Impact of IMPORT on EURO (Dependent Variable: EURO)
Constant -123864.8158 65535 1
EXPORT 0.823685

120
Impact of import on Foreign Exchange
100
Foreign exchange rate

80

60

40

20

0
0 100000 200000 300000 400000 500000 600000
Import

DOLLER POUND YEN EURO Linear (DOLLER)

Coefficient of determination, R2 has exceptionally high, value which indicating

that very good fit between the variables or in other words in all variables is more
than 60.0% of the variance in IMPORT can be explained by USD, EURO and
YEN but in case of POUND only 31% variance explain by Import.

According to regression analysis contribution of IMPORT in change in exchange

rate volatility is very little and impact cannot be developed directly but indirectly
impact can be measured and variation also happens the way of indirect effect in
different segment of the economy.

17
 CONCLUSIONS

Exchange rate is one of the essential indicators of economy’s international

competitiveness, and therefore, has a strong impact on a country’s export and
import development. The empirical literature so far in the relationship between
exchange rate volatility and volume of trade provides mixed evidence. The only
limitation of this study is that the seasonal effect in our model has been ignored
because quarterly data is not available for Pakistan and India. It can be shown
from analysis that the change in export will influence in positive changes in
Indian Rupee against Euro, Pound, Dollar and Yen. But, Import is not positively
influence on exchange rate between Euro, Dollar, Pound and Yen. It can be
concluding that higher the export will result strong value of rupee against Euro,
Dollar, Pound and Yen, but import will not create the strong value of rupee
against the Euro, Dollar, Pound and Yen.

18
 BIBLIOGRAPHY

REFERENCE

 https://www.rbi.org.in/scripts/PublicationsView.aspx?id=20594
 https://www.google.com/search?q=POUND+rate+in+india+2017&oq=POUND+rate
+in+india+2017&aqs=chrome..69i57.7470j0j15&sourceid=chrome&ie=UTF-8
 https://m.rbi.org.in/scripts/AnnualReportPublications.aspx?Id=1306#
 https://m.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=10395#A11
 www.rbi.org.in (Data warehouse) for all variables.

Articles
1. Cathy L. Jabara (2009). How Do Exchange Rates Affect Import Prices?
Recent Economic Literature and Data Analysis. Office of Industries
Working Paper U.S. International Trade Commission (No. Id -21
(Revised))
2. 2. Dr.G.Jayachandran (2013). Impact of Exchange Rate on Trade and GDP
for India -A Study of Last Four Decade. International Journal of
Marketing, Financial Services & Management Research Vol.2, No. 9 pp
154- 170
3. Elif Guneren Genc and Oksan Kibritci Artar (2014). The Effect of
Exchange Rates on Exports and Imports of Emerging Countries. European
Scientific Journal May 2014 edition vol.10, No.13
4. Iqbal, A, Khalid, N. & Rafiq, S. (2011). Dynamic Interrelationship among
the Stock Markets of India, Pakistan and United States. International
Journal of Human and Social Sciences. 6 (1) pp. 31-5. Marion Kohler,
Josef Manalo and Dilhan Perera (2014). Exchange Rate Movements and
Economic Activity. Reserve bank of Australia Bulletin March Quarter
2014

19